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One of the pillars supporting a rally in developing-nation stocks is starting to look shaky, at least in some parts of Asia.

Along with robust economic growth and relatively low valuations, improving earnings have pushed the region’s shares to levels unseen in almost a decade. But Credit Suisse Group AG is sounding a note of caution, saying steep gains in South Korean income projections are masking declines in other markets.

While the consensus earnings estimate for the MSCI Asia ex-Japan Index is 7.5 percent higher since June 2016, that reverses to a 1 percent decline if Korean equities are taken out, the Swiss-based bank said in a July 19 note. One-year forward earnings per share estimates for Philippine and Malaysian companies in the gauge are down 26 percent and 5.9 percent, respectively, in dollar terms over the period, according to data compiled by Bloomberg. That’s prompting a more selective approach from some investors.

"If we don’t get any upgrades it will be harder for the market to push higher as it’s no longer cheap,” said Joshua Crabb, head of Asian equities at Old Mutual Global Investors in Hong Kong, whose Asian stocks fund has returned 25 percent over the past year to beat more than three-quarters of its peers. “This earnings season will be important to see where the beats will be.”

South Korean and Philippine banks can still see some gains, while Indian and Indonesian infrastructure stocks remain attractive, Crabb said.

The main driver for downgrades in Asia ex-Japan is “expensive” Indian and Indonesian equities, Credit Suisse strategists Sakthi Siva and Kin Nang Chik wrote in the note. The lender said it was underweight those markets, along with Malaysia and the Philippines.

"India just doesn’t have earnings power at all," Ajay Kapur, head of Asia Pacific and global emerging market strategy at Bank of America Merrill Lynch in Hong Kong, said in an interview with Bloomberg TV’s Yvonne Man. The firm wants to see an increase in earnings before committing to the market, he said.

Advanced-nation shares are around a third more expensive than developing-country counterparts, based on a comparison of 12-month price-to-earnings ratios for MSCI Inc.’s world and emerging-market gauges. Even so, valuations for some emerging markets are high on an historical basis.

Stretched Valuations

The ratio for India’s Sensex measure is near the strongest in nine years at 18.8, and that’s also 24 percent above the five-year average. Indonesia’s exceeds its five-year average by 6.4 percent.

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Foreign funds have pulled a net $823 million from Indonesian shares this month, set for the biggest outflows since November. The pace of investment is slowing for some other markets. India has lured $581 million in July, compared with $2.2 billion of net purchases over the previous two months, while Malaysian equities attracted just under $200 million since May, set for the weakest two months this year.

A lack of earnings growth at a time when the world’s big central banks are looking to unwind stimulus may make it harder for the MSCI Asia-ex Japan Index to add to its 27 percent gain this this year.

“Stretched valuations for India, Indonesia and Malaysia may invite more caution,” said Jingyi Pan, a market strategist at IG Asia Pte in Singapore. “Investors are likely to be more guarded with regards to these markets unless earnings expectations do match up.”